Insurers operating in the Asia Pacific region need increasing amounts of reinsurance protection following a series of costly catastrophe years and the COVID-19 pandemic, but they should look broadly at both traditional and alternative forms to secure the most efficient protection in the hardening market environment, according to rating agency S&P.
The Asia Pacific insurance and reinsurance market has faced significant losses from severe weather and natural catastrophes over the last two years, S&P Global Ratings explained.
Now, the region faces the costs of the COVID-19 pandemic and following the significant catastrophe losses, is facing a hardening reinsurance market for 2021 and potentially beyond.
As a result, demand for reinsurance protection is likely to rise across the region.
“We believe the need for reinsurance protection strengthened amid the successive catastrophes,” explained Eunice Tan, an S&P Global Ratings analyst in Hong Kong. “This need has become more urgent with the unfolding of the COVID-19 pandemic.”
Globally, the pandemic has heightened risk perception and aversion which is driving increasing uptake of insurance and reinsurance.
In Asia Pacific this is expected to also hold true, as companies look to better protect themselves and insurers look to mitigate and smooth out losses when they occur.
“Global reinsurers will continue to view the region as one of growth and diversification, despite increasing catastrophe losses,” Tan added.
Opportunities abound in the region, both for the domestic or regional players, as well as for the international re/insurance market.
Japan is a prime example, where domestic insurers have largely looked to moderate their catastrophe exposure following heavy losses, buying more catastrophe reinsurance protection and also leaving the door more open to international insurers that can leverage Japanese risks as diversifiers.
“Based on the tendency for Japanese insurers to try and keep a lid on earnings volatility related to natural catastrophes, we believe the appetite for domestic catastrophe risk will be limited and demand for reinsurance will persist,” explained Koshiro Emura, an S&P Global Ratings analyst in Tokyo.
Reinsurance has a significant role to play, as the region faces the reality that more frequent and severe catastrophes than the historical average are likely, while the threat of an acute combination of catastrophe events and mounting concerns around concentration risk and risk accumulations are central for those operating in the Asia-Pacific region.
One of the challenges facing the Asia Pacific region, and insurers or reinsurers from it, is the expected further hardening of reinsurance rates at the January and April 2021 renewal seasons.
As a result, securing the reinsurance protection required could be more of a challenge and so S&P urges insurers to look at all their options.
“The ongoing availability of large reinsurance programs comes at a price. Particularly with the pricing cycle on an upward trajectory and tightening underwriting terms, we believe reliance on reinsurance alone cannot overcome weather-related challenges,” S&P explained.
Adding that, “The industry’s ability to establish additional solutions to natural perils and the pandemic will be key. It could do this through measures such as implementing government backed schemes or seeking new capital resources from alternative investors.”
Of course, no discussion of reinsurance and the importance of protection in Asia Pacific would be complete without mentioning China.
S&P highlights the still significant gap between economic and insured losses for almost every weather and catastrophe event in China, with insurance penetration rising but still falling far behind the increase in economic values at risk.
But work to reform the economy and introduce catastrophe insurance is advancing, albeit at a slow pace and as a result increasing catastrophe reinsurance support will be needed over time.
Overall, S&P believes that, “The value proposition of reinsurance will strengthen after recent tumultuous events: a series of natural catastrophes and the pandemic,” in the Asia Pacific region.
“However, hiking reinsurance price tags will leave insurers deep in thought as to how they can strike the balance between risk and return. While insurers could pass on the costs to policyholders, the economic considerations and potential social backlash may limit the price hike relay/transfer. Inevitably, higher reinsurance costs will narrow profit margins for the primary insurers.”
Which is precisely why insurers in the region should be looking to alternatives such as catastrophe bonds and other insurance-linked securities (ILS), especially with cost-benefits such as the Singapore cat bond grant available, that could make accessing the capital markets for catastrophe reinsurance a more cost-efficient alternative.
Need for reinsurance grows in APAC after catastrophes & COVID-19: S&P was published by: www.Artemis.bm
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Original Article Posted at : https://www.artemis.bm/news/need-for-reinsurance-grows-asia-pacific/